Submitted by Michael Every of Rabobank
There was more bad trade news for markets to focus on yesterday. NBC report Eunice Yoon tweeted: “Mood is Beijing about trade deal is pessimistic, government source tells me. China troubled after Trump said no tariff rollback. (China thought both had agreed in principle.) Strategy now to talk but wait due to impeachment, US election. Also prioritize China economic support.”
In other words, China appears set on trying to ‘wait Trump out’, which was a meme we heard earlier in the trade war, rather than pinning its hopes on a “phase one” deal – of which we have been highly sceptical from the get-go. It also suggests no trade deal at all due to red lines of intellectual property, subsidies, and enforcement mechanisms. Worse, if Trump gets wind of the fact that China is ignoring him, or even has the perception Beijing is working against him politically, it must surely raise the risk of higher US tariffs--at least on 15 December--rather than the risk-on imminent decrease so many have said so loudly for oh-so long.
More positively, the US has agreed to extend permission for its firms to export to China’s tech giant Huawei for another 90 days. However, even that comes ahead of a vote this week at the US FCC to decide if Huawei and ZTE should be officially designated as “national security risks”, which given the constant US effort to prevent its allies from adopting Huawei’s 5G, looks like a fairly predictable decision. Huawei is, of course, a red line for China in many respects.
Meanwhile, with the situation in Hong Kong still extremely tense, there has been another dramatic development. Yesterday saw the High Court rule that the Hong Kong government’s use of colonial-era emergency laws to ban the wearing of face masks was unconstitutional. In response, this morning China’s National People’s Congress has stated that “China’s constitution and the Basic Law jointly form the constitutional foundation of Hong Kong. Whether Hong Kong’s legislation is consistent with the Basic Law can only be judged and decided by the National People’s Congress standing committee. No other parties can judge or decide.” In other words, the High Court ruling is itself over-ruled by a legislative, not a legal, body . Let’s see if the mask ban now stays or goes, for example.
Beyond the response on the ground in already-troubled Hong Kong, this obviously opens up another potential market risk. Both the massive US-China economic security strategy Congressional advisory report last week and the soon-to-be-approved(?) US legislation to support Hong Kong protesters specifically speak of a threat to remove Hong Kong’s separate legal recognition should its autonomy be undermined. That is predicated on any violent intervention by the PLA or People’s Armed Police…but would that red line also extend to the constitutional legal arena? Let’s see what the global business community reaction is today.
Elsewhere, Iran’s closure of its internet continues in response to a major revolt after the removal of fuel subsidies that looks straight out of the Lebanon or Chile playbook. As a response, this apparently isn’t happening if one looks at the press, despite the fact that instability in Iran is of enormous significance geopolitically. Were we to see a repeat of the Green protests on 2009, I doubt the current White House would take as much of a hands-off attitude. That said, the same White House might be able to help reconcile the Iranian public and regime with its latest decision that Israeli settlements built across the 1967 ‘Green Line’ are no longer to be treated as illegal. How that will help sell The Middle-East Deal of the Century when it is released, I don’t know.
And in terms of markets, we saw Trump sit down with Fed Chair Powell. For once he didn’t cross any red lines, such as shouting “Where are my negative rates, you nincompoop!”. That usually arrives by tweet, of course. Trump has also alluded to the possibility of testifying in his impeachment trial, which would make for interesting viewing.
The RBA has also released its latest minutes, which state the Reserve Bank expects wage growth to stay around the recent rate going forwards – so disappointing. Very few firms surveyed expected higher wage growth, and new pay deals were generally delivering lower outcomes than the ones that they replaced. This is zero surprise to us, and a total shock to the RBA, of course, who are now to undertake a detailed review of how the economy has evolved relative to forecasts. Just don’t get your usual economists to do it, please. Indeed, there was a case to cut again in November, we now know, but instead the RBA opted to wait and see if things improved locally and globally before moving towards what was once their red line of basically zero rates.
Overall, there are once again more developments to suggest the risk on move is under greater threat, and this has seen some minor market moves: but like the RBA, the general view is still wait-and-see-and-project-for-the-best.